Reverse mortgages 101: What you need to know

The pitfalls to watch out for

• Reverse money mortgages are expensive up front: The hefty government insurance fee, 2 percent of the value of your home (as opposed to the amount of the loan), is the bulk of the cost. Origination fees are capped at $6,000 on a HECM loan. So closing costs can be as high as $12,000 on a $150,000 loan. 
  
  
• The loans require a lengthy application process: And also a photo ID, which many seniors who don’t drive, don’t have.
  
  
• Never draw more than you need: Unscrupulous lenders sometime urge you to take a larger sum when liquefying the net worth of your house, putting higher fees in their pocket. Take out only the amount you need each month and leave the rest on an equity line of credit that is still available to you at any time.
  
  
• Reverse mortgage proceeds can impact Medicaid eligibility: The money you take should be used immediately, since any funds remaining in your bank account at the end of the month can count as liquid assets. If your liquid assets exceed your Medicaid limits, you can be denied your Medicaid benefits. Reverse mortgage money generally doesn’t affect your Social Security or Medicare benefits.

• Lock your rates in between the time you apply for the loan and the time it closes: It sometimes takes 120 days to process the loan and the amount of money you can qualify for can change dramatically before the loan closes.
  
  
• Be wary of sales pitches: You don’t have to buy any products or services to get a reverse mortgage, except the counseling required for an HECM can be had at little or no cost. If you don’t understand the cost or features of the mortgage being offered or if you feel pressured to finalize the deal, walk away.
  
  
• Your right to cancel: You usually have at least three days after closing to cancel the deal for any reason without penalty, but you must notify the lender in writing. Send your letter by certified mail, return receipt requested, to document your correspondence.  After you cancel, the lender has only 20 days to return any money you’ve paid up to that point.

Where to find help

• The AARP Foundation’s Reverse Mortgage Education Project: Visit www.aarp.org/money/revmort for more information on reverse mortgages and a reverse mortgage calculator to help you get loan estimates.
  
  
• The Department of Housing and Urban Development: Visit www.hud.gov and search “reverse mortgage” to find more information on the FHA’s reverse mortgage, reverse mortgage lenders and HUD-approved reverse mortgage counselors.

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